May the fourth carrier be with you

In the Berkman Center’s 2010 report on “Next Generation Connectivity,” the Harvard-based think tank classified Canada as a case of “regulatory hesitation,” due to the Canadian Radio-television and Telecommunications Commission’s less-than-enthusiastic willingness to discipline incumbent firms.

This week’s release on wireless from the CRTC shows just how far we’ve come since then, but also highlights that we’ve got some way yet to go. There’s a saying that a good regulatory outcome leaves no party happy, and if that’s true, then the CRTC’s “regulatory framework for wholesale mobile wireless services” makes for a good example. That being said, it also has something for everyone, and in that sense it represents a balanced approach for the industry going forward. In this blog post, I’ll provide a rundown on how the decision affects the various parties involved.

National carriers

Throughout the proceeding, the national carriers—Bell, Rogers, and Telus—were univocal in their insistence that there is no competitive problem that needs solving with regulatory intervention. The ground has been paved for this approach since at least 2013, when the School of Public Policy at the University of Calgary released an incumbent-friendly report with the benign title “Wireless Competition in Canada: An Assessment” by Jeffrey Church and Andrew Wilkins (Bell relied heavily on its findings throughout the proceedings).

The rhetoric employed by the national carriers in support of maintaining the status quo was somewhat toned down compared to previous proceedings; gone were the references to “hyper competition,” but the message was nonetheless loud and clear: no market power to see here, move along. The standard supporting arguments were all on display: Canadians are well served by LTE networks, competitors have increased their market share, consumers demonstrate their glowing satisfaction by using their smartphones a lot, and so on.

Thankfully, the CRTC wasn’t fooled: in its assessment of the retail market, it noted that marketshare (by revenue or subscribers) has changed little in the past 5 years, and that barriers to entry prevent more effective competition from emerging. The major barrier to entry, it determined, is the incumbents’ collective control over national networks, which require scarce and expensive spectrum to produce and maintain, and cannot feasibly be duplicated in the short- to medium-term.

This is big news. Since it is the incumbents who erect the barriers to entry, the CRTC determined that Bell, Rogers, and Telus collectively possess “market power” in the wholesale market, meaning that they have the ability to maintain artificially high prices for access to their networks and can reduce the quality of service they offer to competitors. Further, the CRTC determined that the national carriers have in fact been exercising this power to restrain competition from smaller carriers, regional, new entrant, and mobile virtual network operator (MVNO) alike, to the detriment of a healthy market for wireless services.

Pause for a second to consider that this is the first time the CRTC has ever made such a finding in the wireless market since cellular towers started popping up in Canada during the early eighties. Time and again, the CRTC has confidently taken the view that oligopolistic competition is (or will be) “sufficient to protect the interests of users,” and as a result has taken its hands off the wheel while frustrated Canadians have watched competitor after competitor struggle, fail, and eventually be swallowed up by the national carriers. Yesterday’s decision to regulate the terms and conditions (including, most importantly, the rates) of competitors’ access to national networks marks a stark departure from the regulator’s former complacence, and firmly stakes out a position that supports (as opposed to merely allows) the growth of sustainable competition from the fringes.

All of this makes the national carriers look like the big losers in this outcome. While in a certain sense correct, we ought not to shed too many crocodile tears for the shareholders at Bell, Telus, and Rogers just yet. While the carriers will lose the ability to exercise their market power in some respects, the process of moving toward a normal state of competition will be long and fraught with difficulties, and in the end is unlikely to cause any real harm to their business prospects.

The national carriers are expected to file tariffs—published rates based on economic cost studies using a CRTC-approved methodology called “Phase II”—for approval by November. It’s a safe bet to say that in the meantime the incumbents’ accounting departments will be busy piling everything they can into their cost studies for roaming, up to and including the kitchen sink. While it is expected that the rates will ultimately be lower than what currently prevail under the recently-amended Telecommunications Act, there are no guarantees with regard to magnitude, and put another way, the national carriers will be doing everything in their power to make sure that the difference is marginal.

On balance, the national carriers may actually stand to see an overall increase in roaming revenues, as the smaller carriers have already begun to advertise national coverage and provide service plans that encourage their customers to use their services without regard for geographic location. Wind, for instance, has already offered a promotion to users in Alberta that allows national usage without roaming fees, and MTS recently revamped its plans by reintroducing “Canada wide data,” which was previously limited to 300MB before roaming charges of 25¢/MB would kick in (out-of-province data has been increased to up to 2GB, after which MTS will throttle to 256Kbps/s, but impose no additional roaming charges). By removing roaming fees for their retail customers, the smaller carriers encourage greater use of their roaming partners’ networks, usage for which they make volume payments at the wholesale level. And so increased usage, even at the new (presumably lower) rates, could lead to an uptick in the national carriers’ roaming revenues.

The retail marketshare that the national carriers stand to lose based on customers who switch to competitors’ newly-attractive service plans could, in other words, be partially offset by increases in wholesale roaming revenue, and in any case, we should not be lamenting the normal functioning of a competitive market where the incumbent carriers are restricted from unduly exercising their market power. To the extent that the national carriers will be forced to compete on quality of service or (gasp) price, it’s likely that the net effect will be positive with regard to overall social welfare.

Nor are the national carriers being asked to hand over the keys to the kingdom: they have not been required to offer seamless roaming or call hand-back, concessions that the CRTC withheld in order to maintain incentives for the new entrants to build out their own networks (discussed in the next section).

New entrants

The not-so-new entrants—Wind, Vidéotron, Mobilicity, and Eastlink—are clearly winners within the frame of the CRTC’s new regulatory framework. They will be the primary beneficiaries of expected reductions in roaming fees, giving them the certainty that they’ve argued is necessary in order to proceed with their plans for network expansion. As mentioned above, the threat of regulation, combined with the CRTC’s ban on exclusive roaming contracts, appears to have already allowed the smaller carriers to strike better deals with the incumbents than the “take it or leave it” deals that they were forced to accept when Rogers was the monopoly provider for GSM roaming, and to the extent that the regulated rates will be less than those set by the legislated cap, the new entrants stand to reap the benefits.

Additionally, the CRTC’s decision not to mandate access to the national carriers’ networks for MVNOs can be seen as a major boon to the new entrants—they have essentially been shielded against competition from the disruptive likes of Google, Ting, Teksavvy, or Cogeco. While MVNOs are typically far from dominant players, access for wholesalers at regulated rates could potentially undercut the new entrants if the rates are too low, or alternatively could prevent carriers like Wind from achieving greater scale by fragmenting the market. Indeed, under a mandated MVNO scenario, it’s probable that companies like Wind would abandon further network roll out to pursue the MVNO model themselves. With MVNO off the table for now, it’s full steam ahead with the facilities-based “fourth player” model being pursued by Industry Canada. The CRTC has further narrowed the field of possibilities going forward, although it remains to seen whether the new entrants will take up the mantle by continuing to expand.

The CRTC didn’t give the new entrants everything they asked for, however. Seamless hand-off was withheld, meaning that customers who live near the edge of Wind’s network, for example, will continue to experience dropped calls when moving in and out of Wind’s home area. Similarly, the CRTC decided not to mandate call hand-back, meaning that the new entrants will have to accept the rates charged by the national carriers for international call termination. These measures are clearly designed to encourage the new entrants to continue building their own networks instead of simply relying on their existing footprints plus roaming, and will also prevent them from relying on roaming to fill gaps within their operating territory. And finally, no new regulation will be applied to towers and sites, which the national carriers will no doubt continue to leverage as a delay tactic against new entrant expansion. The CRTC has offered its own services as a mediator in disputes over towers, and points carriers to the Part 1 process as well, although it remains to be seen whether these will prove effective tools for negotiating tower access (the existing arbitration under Industry Canada’s spectrum conditions of license have proved unworkable).

Regional carriers

The regional carriers—Sasktel, MTS, and TbayTel—have also come out on top in the new regulatory regime. While they remain subject to the ban on exclusive roaming agreements, they’ve essentially been given what they asked for: they don’t have to provide roaming on their territorial networks to the incumbents at regulated rates. Once the legislated roaming caps are repealed, they will essentially return to the previous state of deregulation, which will maintain or increase their bargaining power with the national carriers. Like the new entrants, they also benefit from protection from MVNOs, and it seems likely that the regionals will continue to deny resellers access to their networks.

The benefits to Prairie and Canadian Shield customers from roaming regulation have largely already materialized: Sasktel already offered Canada-wide data to its customers prior to the wireless proceeding; Tbaytel advertises free roaming in Canadal and, as mentioned above, MTS has recently increased the out-of-province data available to its customers, and appears to have removed roaming overages altogether. But that’s about where it stops: I have a very hard time believing that anything in the CRTC’s framework will result in more competition in the regionals’ respective territories. While Wind does hold some spectrum in Manitoba and Saskatchewan, those areas, which already have four carriers, are unlikely to see a fifth any time soon, as Wind focuses its energies on improving its service within existing footprints and expanding slowly outward from there.

“The public”

For the rest of us, the new wireless framework is more of a mixed bag. The Public Interest Advocacy Centre was quick to declare a “win” for consumers, which is unsurprising given that they had little to nothing to say about the potential benefits of MVNOs during the proceeding. While I agree that the decision should be taken as a victory, I’m a little more circumspect about extending that view to all consumers; customers who live within or near an existing new entrant’s area have been given an opportunity make a real choice, but for the rest of Canada, things will remain more or less the same.

Others have taken a less triumphant stance. Michael Geist was quick to point out that the CRTC’s decision did not go far enough, because it neglected to mandate seamless roaming, call hand-back, and most importantly, MVNO access. Peter Nowak similarly characterized the decision as inconsistent, asking why the CRTC would deem wholesale access necessary in cable TV and wireline Internet, but not for wireless. The Samuelson-Glushko Canadian Internet Policy and Public Interest Clinic (CIPPIC), acting on behalf of openmedia.ca, also argued that the CRTC should have taken a stronger stance on wholesale access for independent competitors, and the Canadian Network Operators’ Consortium (CNOC), dismissed the new framework as a lost opportunity, since it effectively ensures that disruptors like Teksavvy or Distributel will continue to be locked out of the wireless market.

Looking around the world, we see that MVNOs have an important role to play in regulators’ policy visions and in the consumer marketplace as well. The benefits that MVNOs can bring were brought to the fore recently when Google announced that it will be entering the wireless market as an MVNO in the States, although MVNOs like Walmart’s SmartTalk, Toronto-based Ting (not available in Canada), and Republic Wireless have for a long time been providing independent alternatives to our southerly neighbours. These providers, while typically holding small marketshare, tend to serve market segments (e.g. low-income, international travellers) ignored by the major carriers, and are often at the forefront of technical and market innovation, for instance by unbundling minutes, text, and data, or by offering integrated Wi-Fi + Cellular plans that make their services available at insanely low rates.

Regulators such as Britain’s Ofcom recognize the importance of MVNOs in balancing out a marketplace, and expect that network owners who compete for each others’ business will take on wholesalers as part of the process. While wholesale access is not regulated in Britain, the regulator seeks to ensure that there is enough competition between facilities owners that they will host MVNOs naturally—four networks seems to be the magic number. Here in Canada, we only have two national networks, and a constellation of regional ones. In its regulatory framework, the CRTC has encouraged the new entrants to take on MVNOs, but it is hard to see this coming to be in practice, as companies like Wind concentrate on building networks and gaining marketshare from incumbents with already low pricing (in the case of Wind, at least; not so much for Vidéotron and Eastlink).

Rather than declaring the CRTC’s decision an outright win for consumers, I’d classify it as “not a loss.” Some major headway was made, but panacea it is not.

The CRTC

The CRTC itself deserves recognition as a winner in this decision. Considering that just 3 years ago it declared the wireless market to be “sufficiently competitive” and declined to consider structural regulation, the new framework announced this week represents a significant reversal. Basically, the CRTC has taken off the blinders, and put the cozy incumbents on notice.

Some argue that the decision does not go far enough, and I tend to agree. But, given Industry Canada’s hard-line stance toward promoting a fourth national carrier, it’s difficult to see how the regulator could have determined otherwise. In justifying its decision not to mandate wholesale access for MVNOs, the CRTC cited concerns that doing so would have undermined investments made by the facilities-based new entrants. To the extent that their expansion may eventually lead to an organic place for MVNOs in the market, the new entrants must be allowed to develop–so long as there’s a contingency plan in place.

Just two years ago, I was told in no uncertain terms at an industry conference that MVNOs do not provide real competition, and that better solutions lie elsewhere. “Resale” was a four letter word in wireless, not something that deserves serious consideration. Today the CRTC has clearly reversed its view on this matter. Although it has not mandated wholesale in this framework, it has opened the door for the future. Should the new entrants fail to live up to expectations over the coming months and years, it appears that the CRTC has paved the way for a viable remedy: wholesale access similar to what exists in the wireline world. I would not be at all surprised to be having this discussion in a year’s time.

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2 comments

  1. My understanding is that MVNOs are still possible, just not mandated, and that MVNOs will get access to the roaming partners of their host networks at regulated rates. This means that a provider like Google is not prevented from entering the Canadian market as an MVNO assuming that they sign MVNO agreements with multiple regional/new entrant players. For example, they could gain access to much of Canada by signing deals with WIND, SaskTel, MTS, and Videotron.

    There is also the point that while seamless roaming would be nice, there are technological solutions to this problem, including moving to data-based calling. This appears to be the approach that Google is taking, since they are roaming between at least three different networks: Sprint, T-Mobile, and a variety of wifi networks. They don’t drop calls when moving between these networks, and this would seem to be because they’re treating all voice calls as data: the call actually terminates on Google’s servers, and those servers can maintain the call while the handset switches networks and gets a new IP address.

    1. You’re correct that MVNO has not been disallowed, but I strongly doubt that the scenario you’re putting forward will come to pass.

      None of those carriers have shown any interest in MVNOs, and their networks do not overlap nor are they contiguous except in the case of Sasktel and MTS. I would also be interested to see what the Prairie telcos’ network sharing agreements have to say on the topic of MVNOs, or price more generally, not that I expect to get the chance.

      Google hasn’t exactly been enthusiastic about offering these types of services in Canada either, and I’d bet the fact that the Telecom Act now applies to resellers isn’t exactly welcoming to Google.

      Also, for the next time around, there was no finding of market power for the regional incumbents, which will have to be debated should this matter come up again at the CRTC.

      Your point about seamless roaming is a good one, and it also highlights the type of innovations brought to you by virtual operators.

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